New service designed to support the MiFID II reporting requirements

Gillian sat down this week with Ray Tubman (RT) from FinoComp to find out more about the new service they are launching to support the new MiFID II reporting requirements for discretionary managers.

DISCUS. Tell me about the new service that FinoComp are launching?

RT. TierDrop is an independent performance calculation tool which provides platforms and DFMs with the data required to meet the new reporting requirements for MiFID II on the so called “10% depreciation rule” and much more. This rule states that clients are to be notified within 24 hours if a discretionary managed portfolio falls 10% or more in a reporting period.

This innovative new tool calculates the performance of a client’s discretionary managed portfolios, taking into consideration capital movements, the movement of clients between models, between DFMs and with support for assets held on platform outside of models. A choice of industry recognised calculation methods are offered, these include the method espoused by ESMA, Simple Dietz, Modified Dietz, and the more complex internal Rate of Return (IRR) algorithm, giving platforms and DFMs the ability to compare and select a common calculation method to suit their businesses.

Importantly, we are not targeting just a report on clients who have become reportable, but to provide an overview across the entire client base including those who are reportable under the MiFID II legislation. This allows the tool to provide warnings of clients approaching the reporting point (which we call Danger Zone) but also provides really useful analytics of performance and trends across the entire client base.

DISCUS. So can the tool work with any platform?

RT. Yes, the tool is multi-platform enabled so DFMs can monitor individual client portfolio performance across multiple third party platforms through one interface. We think this is a revolutionary step for DFMs managing models across third party platform providers.

TierDrop requires raw data from platforms including holdings, account relationships, capital movements on a daily basis and we perform all of the calculations and historical recording of this input data. This information is then presented back to DFMs, platforms (and intermediaries later in the year) in a very intuitive way.

A unique feature of this module is that it performs the calculation at various levels and presents the results dependent on the user logging in; A platform user will see clients in all discretionary managed portfolios across their platform, and a DFMs user will see all clients in their own discretionary managed models across multiple platforms. These aspects are hugely important because a DFM is only concerned about the portion of the clients’ portfolio that they’re managing, where as a platform or adviser may wish to obtain performance reporting across the clients’ total portfolio.

We have also considered the intermediary in this application and a dedicated view for these users will be launched later in the year. In the interim, we will be collecting relevant data.

Most of the industry is treating this reporting as something that they are doing begrudgingly. We are trying to turn this into something that is of benefit to all parties.

DISCUS. Why do you feel there is a need for TierDrop in the market right now and what are the specific challenges facing DFMs in complying with the new MiFID II requirements?

RT. In our opinion, the biggest challenge will come with the variety of performance calculation methods being used and the lack of accuracy with many of them. There are four that we’re aware of and each can produce vastly different results.

To make our point, below is an example of a clients’ portfolio performance calculated using the various methods over a 90 day period;

Estimation Algorithm adopted by some participants and consistent with ESMA Q&A Guidance (assuming inflows at start of period and outflows at end of period)

(-2.78%)

NO

Whilst we would always recommend the more accurate IRR calculation, we run the calculations through the different algorithms to give us some insight into variance between the calculation methods and to provide flexibility of calculation in the future. It will also enable DFMs to validate results that may be reported by platforms not on the service.

In addition, we believe that a number of platforms who will be reporting the 10% depreciation will not consider the movement of clients between models and between DFMs throughout the reporting period. We know of at least some that will attribute the entire period performance to the DFM to whom they are associated at the reporting date. This would again lead to inaccurate reporting.

DISCUS. Will the new service have any impact on the Adviser or the underlying client?

RT. Absolutely, and positively, some examples of this are;

The reduction in risk of clients being wrongly notified of a portfolio depreciating based on our calculation method.

Configurable automated e-mail alerting to the DFM, adviser and platform ensures client communications can be sent without delay and a “Danger Zone” that highlights portfolios which are approaching the 10% depreciation mark. This gives portfolio managers and advisers the opportunity to analyse the portfolio and build a narrative which, in the 24-hour window, would be a huge challenge. This tackles the industry wide concern that this reporting will create uncertainty and confusion with clients.

Finally, providing an IRR performance calculation for every client account (and not just those who are reportable) is of massive benefit to advisers, DFMs and platforms (and, in turn for the quality of the end client’s reporting) and will lead to much many more client reporting features in the future.

DISCUS. Can you tell me a bit more about FinoComp?

RT. We are an innovative Wealth Management technology company offering a unique approach by developing software as micro-services. Our roots are in Australia where the business was set up in June 2015. Whilst our development centre is in Australia, we solely service the UK Wealth Management market. Our hand selected team of experts have a huge amount of knowledge of the UK platform and wealth management market.

Our growing suite of micro-services include a CGT calculation engine, an Asset data mastering system, fees and charges calculation engine and Model Portfolio tool. Our vision is to offer a comprehensive suite of wealth management components which can be used independently or together and integrated with clients existing systems. All of these solutions are designed, built and tested using cutting edge technology with automation at the forefront of our development processes to ensure speed of delivery is combined with market leading quality.

Our approach affords wealth management companies a unique opportunity of choice to select the best in breed and gain greater agility through an architecture that’s proven to reduce the cost of adapting to change. Our micro-services are easily accessible to wealth management companies of all types and sizes.”